Is Roku (NASDAQ:ROKU) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Roku, Inc. (NASDAQ:ROKU) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that ROKU is potentially overvalued!

What Is Roku's Net Debt?

As you can see below, Roku had US$82.5m of debt at September 2022, down from US$91.1m a year prior. However, its balance sheet shows it holds US$2.02b in cash, so it actually has US$1.94b net cash.

A Look At Roku's Liabilities

The latest balance sheet data shows that Roku had liabilities of US$943.4m due within a year, and liabilities of US$670.9m falling due after that. On the other hand, it had cash of US$2.02b and US$758.9m worth of receivables due within a year. So it can boast US$1.16b more liquid assets than total liabilities.

This short term liquidity is a sign that Roku could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Roku boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Roku can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Roku reported revenue of US$3.1b, which is a gain of 23%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Roku?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Roku had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$129m of cash and made a loss of US$237m. While this does make the company a bit risky, it's important to remember it has net cash of US$1.94b. That means it could keep spending at its current rate for more than two years. Roku's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Roku that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.